A perspective, from a reinsurance viewpoint, on (1) sources of fair value accounting volaility and (2) solutions to reduce volatility.

1. Reinsurance Perspective
Volatility of Fair Value Accounting
Michael Frings FSA, CFA, MAAA
Vice President and Senior Actuary
Global Financial Solutions
RGA Reinsurance Company
SOA Webcast | March 13, 2013

2.  Sources of Fair Value Volatility
 Solutions to Reduce Volatility
Presentation Topics
A reinsurance perspective on ceding company fair value volatility
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3. Sources of Fair Value Volatility
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4.  Assumptions
 Market inputs: interest rates, volatility, strike prices, etc.
 Company inputs: policy holder behavior, mortality, morbidity, etc.
 Models
 Company structure
 Hedging activities
 Accounting Interpretations: Yesterday, Today & Tomorrow
 US GAAP
 US Statutory
 IFRS
 MCEV
Reasons for Fair Value Volatility
Movement due to …
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Need to know your sources of fair value volatility

5.  Income Statement
 Operating Earnings (‘Core’) vs. Non-Operating Income (‘Non-Core’)
 Net Income
 Balance Sheet
 Equity / Accumulated Other Comprehensive Income (AOCI)
 Assets
 Liabilities
 Disclosure Only
Accounting Sources of Fair Value Volatility
With the geography of volatility, some places are better than others…
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Fair value disclosed as required

6.  US GAAP
 ASC 820 (FAS 157) – Fair Value Measurement
 ASC 815 (FAS 133/FAS 155) – Derivatives & Hedging
 Guaranteed withdrawal benefits guarantees in variable & indexed annuities
 Excess indexed benefits in indexed annuities
 Stable value wrap contracts
 Financial guarantees
 DIG B36 – funds withheld coinsurance and mod-co
 ASC 320 (FAS 115) Investments – Debt & Equity Securities
 Designation: Trading (IS & BS effects); AFS (BS/OCI only)
 Other than Temporary Impairment (IS & BS effects)
 ASC 944 (FAS 97/120) – Shadow DAC Asset
 ASC 825 (FAS 107/159) – Fair Value Disclosure
 ASC 250 (FAS 155) – Designating Fair Value of Liabilities
Accounting Sources of Fair Value Volatility
Selected from common accounting pronouncements…
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7.  US Stat
 SAP 43R/99 – Other Than Temporary Impairments
 SAP 86 – Accounting for Derivative Instruments & Hedging Activities
 SAP 100 – Fair Value Measurements
 Actuarial Guidelines 35 & 43
 IFRS
 IAS 7 – Financial Instruments: Disclosures
 IFRS 9 – Financial Instruments
 IFRS 13 – Fair Value Measurement (effective 1 Jan 2013)
 MCEV
 Supplementary embedded value reporting for EU companies
 European Embedded Value (EEV) principles and European Insurance
Market Consistent Embedded Value (MCEV) principles published by
CFO Forum
Accounting Sources of Fair Value Volatility
Selected from common accounting pronouncements…
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8. Solutions to Fair Value Volatility
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9.  Hedge, Hedge, Hedge…is there a perfect hedge?
 Clearly interpret and define Fair Value
 Develop fair value calculation with clear, consistent assumptions
 Can explain fair value movements better to management & investors
 Adopt ‘book value’ rather than ‘fair value’ approaches
 Does this sweep financial issues under the rug?
 Discourage risk management?
 Find Another View of the Business
 Another – The Another could be...
 Reinsurer(s)
 Buyer(s)
 View – Their View could be…
 Are in a different accounting regime
 Likes the risk better than you
What Can Insurers Do
Some solutions…
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10.  Reinsure mortality/longevity risk only
 Cheaper like YRT on the net amount at risk
 Doesn’t address fair value issues
 Coinsure business
 Straight co/mod-co structures which are akin to selling the business
 Funds withheld structures create US GAAP DIG B36 fair value volatility
 Structure reinsurance to carve out risks
 Use capital markets and reinsurance solutions to carve out
market, mortality and policyholder behavior risks
 Difficult to find those willing to take each of the risks…concentration of
risks!
 Parent of insurer may keep some risk(s) entirely or the tail risk(s)
Some Reinsurance Solutions for Fair Value Risks
Includes variable annuities, indexed annuities, etc…
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11.  Counter-party risk present
 Complicated structured finance solutions
 Volatile fair value marks unpopular with analysts
 Reinsurer and ceding company have different view of risk
 Draw conclusion that base contract + rider are under priced.
 Real world v. risk neutral
 Market capacity is low
 Lack of secondary market  lack of opportunity to make money?
Challenges with Reinsuring Fair Value Risk
Often begin with differing views on measurement of risk…
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Reinsurers also want profitable business, too!

12. Thank you for your attention.
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